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Luxembourg authorities have taken action for a second time this year concerning funds that invested in Bernard Madoff, by today ordering the closure of a defrauded portfolio that was linked to Swiss bank UBS.

In a relatively rare move for the duchy, Luxembourg's commercial court ordered the dissolution of a fund, which UBS set up in 2007 at the request of wealthy individuals who wished to put their money with fraudster Bernard Madoff.

The order to liquidate the Luxembourg Investment Fund is now the second time the duchy has taken action over Madoff-exposed funds with links to the Swiss bank.

In February the regulator, Commission de Surveillance du Secteur Financier, demanded the winding down of the Luxalpha fund, which was domiciled in Luxembourg, and to which UBS acted as custodian. It also gave UBS's operations in Luxembourg three months to improve the systems and staffing in their custodial bank.

One investment consultant said: "We have seen regulators speak about better due diligence and business practices generally, but for regulators to take action against specific products is not so common."

The Luxembourg Investment Fund, which was the subject of today's court order, had six sub-funds within it. One of these, which was focused on US shares, had money with Madoff.

The UBS spokeswoman said this sub-fund was "not a UBS product" and was "created at the explicit request of wealthy clients who requested a tailor-made fund to enable them to invest their assets with Madoff".

She added: "We support the court's decision to appoint liquidators for the Luxembourg Investment Fund."

Although a unit of UBS in Luxembourg was listed in fund documents as its manager, UBS had delegated some activities in running it to a Gibraltan investment manager.

UBS in Luxembourg was, however, entitled to earn a slice of the fund's management fee, according to fund documents. UBS in Luxembourg acted as the custodian, the main distributor and administrative agent to the fund, the documents said.

In March last year, the last point for which Financial News had details of the size of the sub-fund, it had €633.7m ($867m) net assets. It was not clear whether all these assets were invested in Madoff.

The UBS spokeswoman said: "These clients were represented by a sophisticated financial institution being fully aware of the nature of the investments."